Bankruptcy Courts as Adjuncts to Article III Courts

prev | next

Article III, Section 1:

The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. The Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office.

In 1978, Congress revised the Bankruptcy Act and created bankruptcy courts as adjuncts of the district courts.1 The courts were composed of judges vested with practically all the judicial power of the United States; however, the judges served for fourteen-year terms, subject to removal for cause by the judicial councils of the circuits, and with salaries subject to statutory change. The bankruptcy courts were given jurisdiction over not only civil proceedings arising under the bankruptcy code, but also all other proceedings arising in or related to bankruptcy cases. Review was available in Article III courts, but decisions could be reversed only if clearly erroneous.

This broad grant of jurisdiction brought into question what kinds of cases could be heard by an Article I court. In Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., a plurality of the Supreme Court held that the conferral of jurisdiction upon Article I judges to hear state claims regarding traditional common law actions was unconstitutional.2 In a narrow holding, a plurality of the Court sought to rationalize and limit the Court’s jurisprudence on Article I courts. According to the plurality, a fundamental principle of separation of powers requires the judicial power of the United States to be exercised by courts having the attributes prescribed in Article III. Congress may not evade the constitutional order by allocating judicial power to courts whose judges lack security of tenure and compensation. Only in three narrowly circumscribed instances may judicial power be distributed outside the Article III framework: in territories and the District of Columbia; courts-martial; and the adjudication of public rights.3 In bankruptcy litigation not involving any of these exceptions, the plurality concluded, the judicial power cases could not be assigned to the tribunals created by the Act.4

The lack of a majority in Northern Pipeline left unclear the degree of discretion left in Congress to restructure the bankruptcy courts and placed in question the constitutionality of other legislative efforts to establish non-Article III tribunals. Congress responded to Northern Pipeline by enacting the Bankruptcy Amendments and Federal Judgeship Act of 1984.5 Under the Act, bankruptcy courts remained as Article I entities, and overall their powers as courts were not notably diminished. However, Congress established a division between core proceedings, which could be heard and determined by bankruptcy courts, subject to lenient review, and other proceedings, which, though initially heard and decided by bankruptcy courts, could be reviewed de novo in the district court at the behest of any party, unless the parties consented to bankruptcy court jurisdiction. A safety valve was included, permitting the district court to withdraw any proceeding from the bankruptcy court on cause shown.6

In Granfinanciera, S.A. v. Nordberg, the Court considered whether a jury trial was required under the Seventh Amendment for a claim by a Chapter 11 bankruptcy trustee to void an allegedly fraudulent money transfer.7 The Court found that the cause of action was founded on state law and, although denominated a core proceeding by Congress, was actually a private right.8 Similarly, the Court in Stern v. Marshall held that a counterclaim of tortious interference with a gift, although made during a bankruptcy proceeding and statutorily deemed a core proceeding, was a state common law claim that did not fall under any of the public rights exceptions.9 By contrast, in Executive Benefits Ins. Agency v. Arkison, the Court held that when the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy-related claim, both the statute and the Constitution are satisfied if the bankruptcy court treats the matter as a non-core claim and issues proposed findings of fact and conclusions of law to be reviewed de novo by the district court.10 And, as the Court later held in Wellness International v. Sharif, a bankruptcy court may adjudicate with finality a so-called Stern claim—that is, a core claim that does not fall within the public rights exception—if the parties have provided knowing and voluntary consent.11

1: Bankruptcy Act of 1978, Pub. L. No. 95–598, 92 Stat. 2549(codified in scattered sections of 11, 28 U.S.C.). The bankruptcy courts were made adjuncts of the district courts by § 201(a), 28 U.S.C. § 151(a).
2: 458 U.S. 50 (1982) (plurality opinion).
3: Id. at 63–76.
4: The plurality also rejected an alternative contention that, as adjuncts of the district courts, the bankruptcy courts were like United States magistrates or the agencies approved in Crowell v. Benson, 285 U.S. 22 (1932), to which could be assigned fact-finding functions subject to review in Article III courts. N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 76–86 (1982). According to the plurality, the act vested too much judicial power in the bankruptcy courts to treat them like agencies, and it limited review by Article III courts too much.
5: Pub. L. No. 98–353, 98 Stat. 333; 28 U.S.C. §§ 151-159.
6: See 28 U.S.C. § 157.
7: 492 U.S. 33 (1989).
8: Id. at 55.
9: 564 U.S. 462 (2011).
10: 573 U.S. 25 (2014).
11: 575 U.S. 665 (2015). For additional discussion of the role of consent in determining which claims legislative courts can hear, see ArtIII.S1.9.9 Consent to Article I Court Jurisdiction.